CSOP (Company Share Option Plan) 2026/27: Complete Guide

What CSOP Is

The Company Share Option Plan is one of the UK's longest-established tax-advantaged share option schemes, giving selected employees and directors the right to acquire shares at a fixed price in the future, with no Income Tax or National Insurance due on grant, and none on exercise provided the option is held for the required qualifying period.

Unlike EMI, which is restricted to smaller, independent trading companies, CSOP is available to almost any UK company, including main-market and AIM-listed companies, subsidiaries of larger groups, and businesses that fail the EMI trading or size tests, making it the natural fallback scheme for companies that have outgrown EMI eligibility or were never eligible in the first place.

Eligible Companies and Employees

CSOP has far fewer restrictions on the granting company than EMI, but individual eligibility rules still apply.

• Company conditions: No independence, trading activity, gross assets or employee-number tests apply, unlike EMI, so listed companies and larger groups can operate CSOP freely.
• Employee/director selection: The company chooses which employees and directors to grant options to; there is no requirement to offer options to the whole workforce.
• Shareholding restriction: An individual (with associates) generally cannot hold, or have an option to acquire, more than 30% of the company's share capital and still receive CSOP options.
• Individual limit: No employee can hold unexercised CSOP options over shares worth more than £60,000 at grant, across all CSOP options they hold.

Tax Treatment: Grant, Exercise and Sale

No Income Tax or National Insurance arises when qualifying CSOP options are granted. Provided the option is exercised at least three years after grant (or earlier for a permitted reason such as a takeover, redundancy, retirement, ill health or death), and the exercise price was set at or above market value on the grant date, no Income Tax or National Insurance is due on exercise either.

Exercising within the first three years without a qualifying reason generally results in the increase in value being taxed as employment income (through PAYE and National Insurance) rather than as a capital gain, which significantly reduces the scheme's tax advantage. Once shares acquired through a qualifying exercise are sold, any further increase in value is taxed as a capital gain at 18% or 24% depending on the seller's tax band.

CSOP vs EMI

EMI is generally more generous where a company qualifies for it: a much higher £250,000 individual limit, no minimum holding period before exercise (options can be exercised at any time after grant without losing tax-advantaged status, subject to the underlying agreement), and a special relaxation of the Business Asset Disposal Relief shareholding test. CSOP's advantage is availability: it can be used by listed companies, larger private companies, and businesses in excluded sectors that EMI cannot reach at all.

Many growing companies start with EMI while they qualify, and move some or all of their option arrangements to CSOP once they outgrow the EMI size limits or complete a listing, since EMI options already granted are unaffected by a later change in eligibility for new grants.

Setting Up and Reporting a CSOP

A company must register its CSOP with HMRC through its PAYE online account, and self-certify that the scheme meets the qualifying conditions in law. Unlike EMI, there is no requirement to notify HMRC of each individual option grant within a fixed number of days, but the company must still submit an annual return each year confirming grants, exercises, and any lapses of options under the scheme.

Getting the scheme rules and option agreements right at the outset matters, since HMRC can withdraw tax-advantaged status from a scheme (and any options already granted under it) if it does not meet the statutory requirements.

Worked Example

A listed company grants a senior manager CSOP options over shares worth £40,000 at grant, with an exercise price equal to that market value. Four years later, having held the option for more than the three-year qualifying period, the manager exercises the option when the shares are worth £95,000, and sells them shortly afterwards for the same amount.

No Income Tax or National Insurance is due on grant or exercise because the qualifying period was met. The gain of £55,000 (£95,000 sale proceeds less the £40,000 exercise price) is taxed as a capital gain at 18% or 24% depending on the manager's income tax band, rather than as employment income.

Common Pitfalls

• Exercising too early without a qualifying reason. Exercising before the three-year holding period, other than for a permitted reason, converts the gain into taxable employment income rather than a capital gain.
• Setting the exercise price below market value. This can compromise the tax-advantaged treatment entirely, so a robust, defensible valuation at grant matters just as much as it does for EMI.
• Exceeding the £60,000 individual limit. Options over shares worth more than the limit at grant will not receive tax-advantaged treatment for the excess.
• Assuming CSOP gets the same BADR relaxation as EMI. CSOP shareholders generally still need to meet the standard 5% shareholding and voting rights test to claim Business Asset Disposal Relief.
• Missing the annual return deadline. Failing to file the required annual CSOP return can put the scheme’s tax-advantaged status at risk over time.